LIVE ON STAGE AT STARBUCKS' ANNUAL MEETING

A Corporate Agenda to Expand Music Business and Launch Digital Download Network

SEATTLE (AdAge.com) -- When the curtain rose on Marion Oliver McCaw Hall yesterday, home of the city's ballet and opera companies, it revealed a full choral group performing "O Fortuna." Behind the chorus on a large screen flashed images of people smiling and laughing along to the music before ending with a single sentence: "It all starts with a cup of coffee."

Photo: AP

Tony Bennett is working on two CD projects for Starbuck's music unit.

Later, Tony Bennett, approaching his 80th birthday, crooned four tunes, including his signature, "I Left My Heart in San Francisco," bringing the crowd to its feet. At that moment you realize this isn't a typical annual meeting, but it's what Starbucks shareholders have come to expect.

"We're in the experience business," Chairman Howard Shultz told reporters. The year before, the company surprised shareholders with a performance from Herbie Hancock; the year before that, Emmylou Harris.

New meaning to piping hot coffee
Indeed, the meeting was heavier on entertainment than financials. The company reenacted a gag from a recent David Letterman show in which the late-night host piped coffee 550 feet from a neighborhood Starbucks to his desk during a show taping. Starbucks' version piped coffee 3,100 feet from a store atop the Space Needle to Mr. Shultz on stage at the 5,000-seat auditorium as a camera followed its progress. The crowd roared as the coffee splashed into a dispenser and Mr. Schultz poured himself a cup.

Sure, management outlined the financial and operational achievements for the year. Shares reached their all-time high on last week's record first quarter performance, stores reached 11,000 units, traffic grew to 40 million customers per week making Starbucks the most frequented retailer in the world, and shares rose 6,400% since going public in 1992.

But even during the business portion of the meeting, when shareholders vote on important topics, the agenda took about as much time as downing a grande latte.

The question and answer period also was brief. There were no long filibusters from animal rights or environmental activists. One shareholder did complain about Starbucks sponsoring a rodeo and another questioned what the company was doing to reduce paper and plastic waste. Even then, they asked almost apologetically and the responses from management were brief, and quickly accepted.

Canned coffee drink launch
Starbucks said it would launch in the U.S. next month an iced canned coffee drink called Starbucks Iced Coffee to capture its share of the $850 million ready-to-drink coffee segment. Produced through the company's joint venture with Pepsi-Cola Co., the product will be in Starbucks company-owned stores in March and in grocery and convenience stores by May. Omnicom Group's Goodby, Silverstein & Partners, San Francisco, will handle advertising duties for the product.

Gerry Lopez, president, Starbucks Global Consumer Products, acknowledged that soft-drink giant Coca-Cola Co. has cornered the canned coffee market in Japan, but said Starbucks reenergized the chilled cup coffee business there with its Starbucks Discoveries drink. Coke has yet to launch a canned coffee in the U.S. but plans to introduce its coffee cola Coca-Cola Blak later this year.

Starbucks also will introduce line extensions in its Frappuccino portfolio with Starbucks DoubleShot Light and Strawberries and Creme Frappuccino this May. The marketer said it has sold more than 434 million bottles of Starbucks Frappuccino coffee drinks in 2005, extending the store experience that would otherwise have taken 500 cafes eight hours a day for a full year to crank out the equivalent.

Mr. Schultz and Ken Lombard, president of Starbucks Entertainment, also previewed the forthcoming Lionsgate film "Akeelah and the Bee." The film is the company's latest entertainment venture, but Mr. Schultz said it was part of Starbucks' strategy from the beginning. "Starbucks has emerged as one of he most powerful market-makers," he told the shareholders from a stage filled with cafe tables, chairs and couches to re-create a store interior.

Ongoing music projects
Mr. Bennett's performance brought to life two CD projects he has agreed to develop. The first, in honor of his birthday, will be a 15-track commemorative called "Through the Years," as part of the Starbucks' Hear Music Opus Collection. It will be sold in company-operated stores beginning April 4. A duets album through RPM/Columbia with artists from Bono to Billy Joel will be released later in the year.

The entertainment unit also plans to release a debut CD, "Words Came Back to Me," from 16-year-old Sonya Kitchell, to be released simultaneously at Starbucks and music retailers through Velour Music Group and Starbucks Hear Music.

Messrs. Schultz and Lombard outlined the successes of the year, including the eight Grammy awards for the late Ray Charles' "Genius Loves Company" and the debut of the band Antigone Rising, which sold 121,000 CD units since May in Starbucks.

The marketer intends to boost its stores worldwide to 30,000 units, with aggressive plans in the U.S. and China. Mr. Schultz told reporters he hopes to make China the second-largest market behind North America. Currently with about 400 stores in China, Starbucks is among dozens of American companies clamoring to set up shop.

"A lot of companies will go to China because it's the next gold rush," he said, adding that the company already has made many investments in the country and its culture. "Many people that go into China get burned and we're not going to be one of them."

Becoming a digital network
In its attempts to extend the brand beyond its four walls into entertainment and the community in what he called "the Starbucks effect," Mr. Schultz said the company has the largest Wi-Fi footprint of Internet hotspots, but it has yet to adequately leverage the service. He hopes to soon use that footprint to tap into the digital downloading craze by providing content for consumers.

While he said the CD business "has a very long life," having Wi-Fi gives Starbucks a "unique proprietary competitive advantage." "We understand the cultural relevancy of digital fill-up. I can't say when, but it's in our future." He wouldn't provide many specifics but said the company may partner with entertainment or Internet providers to create a proprietary network. "Starbucks is a network," Mr. Schultz said.

He said five years ago Starbucks couldn't get record companies to return calls but now the coffee chain is "bombarded" with offers ever day. "We turn down 99%, maybe more" of the things presented, Mr. Schultz said.

Movie deal
For "Akeelah and the Bee," a film about a young African-American girl who challenges the obstacles against her to compete in a national spelling bee, Starbucks took an equity position in the "front end and the back end" on box office and DVD sales, he said. Starbucks took interest in "Akeelah" because the film enhances the message of unity and community and because it introduces the movie to an audience crossing over to LionsGate that it "wouldn't otherwise reach."

Starbucks also is trying to transcend the physical imagery associated with its fabled "third space" between home and work to be relevant to a nation as addicted to drive-thru as it is to coffee. "When we do drive-thru well, you feel a connection with those baristas in the store," said Jim Alling, president, Starbucks U.S. "You can hear that smile through the speaker."

Missing from the love-in was an admission that later came from Mr. Alling, who said the indulgent chocolate drink Chantico "did not meet our expectations." The drink, essentially a chocolate bar melted into a cup, was meant to be a mid-day snack but proved to be "polarizing," he said. "We learned it was too singular."